The Fine Print Australia · PUBLISHED 23 JUN 2026 · VERIFIED 23 JUN 2026 · AU EDITION

Is Your Holiday Home a 'Leisure Facility'? ATO's 2026 Tax Trap

▶

From 1 July 2026, an Aussie with a $900,000 coastal holiday home who rents it part‑time but uses it heavily over Christmas could lose around $27,000 a year in tax deductions on interest, rates, land tax and insurance if the ATO classifies it as a “leisure facility,” meaning those costs become non‑deductible under draft ruling TR 2025/D1 and related guidance.

The number that matters

Big stat: About 2.24 million Australian rental property landlords lodged rental schedules in 2021–22, and the ATO has flagged “extensive incorrect claims” on holiday homes as a key focus area in its rental property deduction crackdown, with disallowed deductions often running into the tens of thousands of dollars per property.

• Number: 2.24 M
• What it measures: Individual taxpayers reporting rental income (many of whom own holiday homes or short‑term rentals) in 2021–22, a cohort now directly exposed to the ATO’s 2026 holiday home/leisure facility crackdown.
• Source & year: Australian Taxation Office, “Rental properties – statistics 2021–22” and holiday homes guidance updated May 2026.

How it quietly costs you

Problem 1: Holiday homes being reclassified as “leisure facilities” so you lose most of your deductions.

Mechanism – how the trap works

• Under the ATO’s new guidance (Draft Taxation Ruling TR 2025/D1 and related Practical Compliance Guidelines), if your property is used mainly for private holidays or recreation rather than genuinely being run as an income‑producing rental, it can be treated as a “leisure facility” under section 26‑50 of the Income Tax Assessment Act 1997.
• The ATO looks at whether the property is “used or held mainly for the purpose of producing assessable income.” If not, it can be classed as a leisure facility even if you rent it out for part of the year.
• Indicators it is not mainly income‑producing include:
• Not making it available in peak seasons (Christmas, Easter, school holidays).
• Setting rent unreasonably high so no one books.
• Limiting guests (no kids or pets) or mostly renting to family/friends at below‑market rates.
• Blocking out popular dates for your own use while claiming it is “available for rent.”

If the ATO concludes private use is prioritised over income, it can apply section 26‑50 to treat the property as a leisure facility.

Impact – what you lose in dollars

Once classed as a leisure facility:

• Denied in full:
• Mortgage interest
• Council rates
• Land tax
• Insurance premiums
• Repairs/maintenance and depreciation on fixtures and fittings
• Still deductible (generally):
• Direct rental expenses such as advertising fees, platform commissions (Airbnb/Stayz), and cleaning for guest stays.

There is no apportionment for ownership costs: the ATO can deny them even for the part of the year the property is rented out.

Concrete example – negative gearing turned off

Assume:

• Holiday home value: $900,000
• Interest‑only loan at 6% = $54,000 interest per year (estimate).
• Council rates: $3,000 per year (typical for coastal councils; estimate).
• Land tax (for an investor in NSW/VIC with land above threshold): around $4,000 per year (mid‑range estimate).
• Insurance: $1,800 per year (mid‑range home insurance estimate).

Total annual “holding” costs that are normally deductible for an investment property: about $62,800.

Under the old position (if genuinely available for rent):

• If the property was treated as investment and negatively geared, a landlord on a 37% marginal tax rate plus Medicare levy (39% total) could claim $62,800 of deductions, saving roughly $24,500 tax per year (0.39 × 62,800; modelled).

Under the new leisure facility stance:

• If the ATO classifies it as a leisure facility, that same owner could lose the deduction for most of the $62,800 holding costs and only claim a few thousand in direct rental costs, cutting tax savings by around $20,000–$25,000 per year, depending on income and actual expenses.

CPA Australia summarises that once section 26‑50 applies, “expenses such as mortgage interest, council rates, land tax and maintenance cannot be claimed, and the only allowable deductions will be for cleaning expenses, advertising and agent platform fees.”

Old vs “better” behaviour

• Old/common behaviour:

• Block out school holidays for your family.

• Set inflated nightly rates the rest of the year so it rarely books.

• Still claim full interest, rates, and maintenance as rental deductions.

• Better / ATO‑compliant behaviour:

• Make the property genuinely available during peak periods.

• Use commercial market rates (roughly within 10% of comparable properties) and do not favour friends at discounted rent.

• Keep personal use limited and clearly documented as private so expenses are fairly apportioned, not denied wholesale.

The second, compounding trap

Problem 2: State land taxes and new vacant/holiday home taxes piling on top of lost deductions, especially from 1 January 2026 for vacant residential land.

Mechanism – how the extra taxes kick in

• Several states already apply surcharges or special taxes on holiday homes and vacant land, but Victoria is the clearest example with its Vacant Residential Land Tax (VRLT).
• From 1 January 2026, new VRLT rules in Victoria extend to undeveloped residential land in parts of metropolitan Melbourne and impose a 1% tax on the capital improved value (CIV) of land that has been vacant for at least five continuous years.
• The rate then increases by 1 percentage point each consecutive year VRLT applies, up to a cap of 3%.
• This VRLT is in addition to existing land tax.

This means a holiday home or vacant block held for a future holiday home can simultaneously:

• Lose Commonwealth tax deductions under the ATO’s leisure facility approach.
• Attract state‑level VRLT of up to 3% of value if it sits vacant long enough (Vic).
• Continue to incur standard state land tax based on unimproved land value (NSW, VIC, QLD etc.).

Concrete VRLT cost example (Victoria)

Assume:

• Undeveloped residential land in metropolitan Melbourne with capital improved value (CIV) of $800,000.

VRLT from 1 January 2026:

• Year 1: 1% of CIV = $8,000 extra tax.
• Year 2 (if still triggering VRLT): 2% of CIV = $16,000.
• Year 3 onwards (cap): 3% of CIV = $24,000 per year.

Over 5 years at capped 3% (assuming CIV stable for simplicity):

• VRLT alone could total roughly $120,000 (5 × 24,000), on top of normal land tax and rates.

If the owner imagined this future holiday home block as an “investment” but uses it mainly as a private asset, they can get hit both by:

• State VRLT up to 3% per year (Vic).
• ATO denial of negative gearing and other deductions once it becomes a holiday home with significant private use (Commonwealth).

Combined mechanism with ATO rules

For holiday homes already built and partly rented:

• The ATO now requires owners to demonstrate the property is mainly held for income‑producing purposes, with evidence like high occupancy, peak‑period availability and market‑rate pricing.
• Where the property is seasonal or under‑used, low occupancy and high private use may both:
• push it into high‑risk territory for ATO scrutiny and leisure facility treatment
• keep it under the radar as “unused” or “vacant” for state VRLT and similar taxes if local rules extend to built properties in the future.

Long‑run financial impact is that an owner could:

• Lose tens of thousands per year in federal tax deductions.
• Pay thousands to tens of thousands per year in additional state taxes.

Over a decade, that can easily accumulate to six‑figure losses.

What this looks like in practice

Persona

• Name: Lisa
• Age: 48
• Job: Senior nurse in a public hospital
• Income: $135,000 taxable income (including penalty rates; within common salary bands for senior nurses).
• Property: Coastal holiday house in NSW bought for $950,000 in 2022, current estimated value $1.0 million (agent appraisal; assumption).
• Loan: Interest‑only investment loan of $800,000 at 6% interest = $48,000 interest per year (assumption).
• Other annual costs:
• Council rates: $3,000
• Land tax: $3,500 (based on unimproved land value and NSW thresholds; mid‑range estimate)
• Insurance: $1,700
• Maintenance/repairs: $2,800 (average over several years).
• Account type: Held in her own name, claimed as a rental investment in past tax returns.
• Use pattern: Rented via Airbnb for about 90 nights a year; blocked out for Lisa’s family over Christmas, Easter and most school holidays; friends often get it at half the advertised nightly rate.
• Years to retirement: About 17 years (plans to retire at 65).

Total typical “ownership” costs: $59,000 per year (48,000 + 3,000 + 3,500 + 1,700 + 2,800).

Discovery 1 – Her “investment property” is now a high‑risk leisure facility

• Under ATO guidance, high‑risk arrangements involve “significant personal use during peak periods, limited attempts to rent the property and/or unreasonable restrictions on potential guests.”
• Lisa discovers that because she takes the place herself in every school holiday and rents to friends at below‑market rates, the ATO could treat her property as a leisure facility under section 26‑50, denying deductions for interest, rates, land tax, maintenance and depreciation in full.
• On her current pattern, she was planning to claim the full $59,000 per year as deductions.
• At her marginal tax rate of 37% plus 2% Medicare levy (39%), that deduction would reduce her tax bill by about $23,000 per year (0.39 × 59,000; modelled).
• If reclassified as a leisure facility, that $23,000 annual tax saving disappears, and she can only claim minor rental‑direct costs (cleaning, advertising, platform fees), perhaps $5,000–$7,000 per year, saving just $2,000–$3,000 in tax instead (modelled).

Discovery 2 – “Available for rent” does not mean “I can block every holiday”

• The ATO’s holiday home guidance states you can only claim deductions for periods when the property is used or held for use mainly to produce rental income, and you must apportion expenses when there is private use or below‑market rent to family/friends.
• It also lists clear warning signs such as not making the property available during peak seasons or charging mates‑rates as indicators you are not genuinely trying to earn income.
• Lisa assumed that having the listing “live” year‑round meant it was available for rent and that she could claim nearly all costs.
• But because she blocks out about 120 peak‑season days per year for herself and friends, the ATO can argue that the property is mainly used for private recreation rather than to produce income.
• She realises that in a proper apportionment scenario, she might only be able to claim expenses for around 25%–30% of the year (roughly 90 rented nights), not 100%, which would reduce her allowable deductions by about $40,000–$45,000 per year compared with what she expected (modelled on 59,000 × 70%–75% being private).

Discovery 3 – Over 17 years to retirement, the tax trap is a six‑figure hit

Assume:

• Lisa keeps doing what she is doing.
• ATO applies leisure facility rules from 1 July 2026 (the ATO’s transitional compliance approach indicates it will not review expenses incurred before that date, but full compliance is expected from the 2027 income year onward).
• Lost annual tax benefit: about $20,000–$23,000 per year (difference between what she thought she could claim and what remains deductible).

Over 17 years:

• Annual lost tax benefit of $21,000 (mid‑point estimate) × 17 years = $357,000 in additional tax paid over her remaining working life (ignoring inflation for simplicity; modelled).

If instead she restructured usage so the property was clearly mainly income producing:

• Suppose she restricted personal use, made it available in peak periods, and increased paying guest nights to 200 nights per year at market rates.
• Her occupancy and income would improve, and she’d likely keep most of the $59,000 annual deductions (subject to apportionment for any private use).
• That could preserve hundreds of thousands of dollars in tax deductions and rental income over 17 years compared with staying in the high‑risk pattern.

The full cost of doing nothing

For Lisa, combining Problem 1 (loss of deductions via leisure facility classification) and Problem 2 (rising state land‑type taxes) yields a very large lifetime cost.

Modelling basis

Assumptions:

• Property value stable at $1.0 million; land component subject to ordinary state land tax approximated in her current figures.
• Federal ATO rules: from 2026–27 onward, her property is treated as a leisure facility, denying $59,000 per year of ownership deductions except for minor rental‑direct expenses.
• Lost tax benefit: $21,000 per year (mid‑point of 20k–23k) over 17 years.
• State taxes:
• Land tax currently $3,500 per year, assumed to rise modestly to $5,000 per year on average over the next 17 years (because of rising land values and indexation; modelled).
• She could also be caught by any future NSW holiday‑home/vacancy surcharges mirroring Victoria’s VRLT trend, potentially adding another $3,000–$5,000 per year in the out‑years if introduced (this part is speculative, based on VRLT design in Victoria as a template).

Across 17 years:

• Lost federal deductions / higher federal tax:
• 17 × $21,000 = $357,000 extra tax paid (modelled, based on denied deductions).
• State taxes above what she expected as “just rates”:
• Extra land‑type charges and potential surcharges averaging say $3,000 per year above her original expectations = 17 × 3,000 = $51,000 (partially speculative but anchored to VRLT‑style rates of up to 3% on high‑value land).

Combined indicative lifetime impact: approximately $400,000+ in extra tax and lost deductions over her remaining working life if she does nothing (modelled using the ATO guidance and VRLT settings).

That is before considering compounding lost investment returns if she had redirected those savings to super or other investments.

What to do about it

Each move: under 30 minutes, free, using official or regulator‑backed tools where possible.

Move 1 – Audit your holiday home usage against ATO criteria

1. Action: Review your holiday home’s private use, pricing and availability against the ATO’s holiday home rules and draft TR 2025/D1 standards.

2. Tool/portal:

• ATO website – “Holiday homes” guidance (Property and land > Holiday homes) provides clear examples of when you can and cannot claim deductions and when you must apportion expenses.

3. Steps:

Sources

• https://www.ato.gov.au/individuals-and-families/investments-and-assets/property-and-land/holiday-homes

Researched 2026-06-23.

Corrections & disclosure: an AI-assisted, human-reviewed guide. Every figure is dated and sourced above. Spot something out of date or wrong? Tell us and we’ll correct it — corrections are noted here and in the video description.